RBI has proposed changes in regulations applicable to the Housing Finance Companies or HFCs. The proposal was open for public comments until July 15, 2020. RBI reviewed the extant regulatory framework applicable to Housing Finance Companies, with a view to regulating the Housing Finance Companies as a category of the Non-Banking Financial Companies (NBFCs). For areas in which the extant Housing Finance Company regulation differs from that of the NBFCs, the changes will be introduced in the least disruptive manner. The key proposed changes relate to the classification of Housing Finance Companies as systemically important, the harmonization of definitions of capital with that of the NBFCs, the liquidity risk framework, the securitization framework, the information technology framework, and the implementation of Indian Accounting Standards.
The regulation of Housing Finance Companies was transferred from the National Housing Bank to RBI, with effect from August 09, 2019. After this transfer, it was decided that RBI will review the extant regulatory framework applicable to the Housing Finance Companies and issue the revised regulations in due course. Until the revised guidelines are issued, the Housing Finance Companies shall continue to comply with the directions and instructions issued by the National Housing Bank. Harmonization of the extant regulations of the Housing Finance Companies will be done in phases, over a period of two to three years. The major changes envisaged in the regulatory framework for Housing Finance Companies, include the following:
- Defining principal business and qualifying assets for the Housing Finance Companies
- Defining the phrase "providing finance for housing" or "housing finance"
- Classifying Housing Finance Companies as systemically important (asset size of INR 5 billion and above) and non-systemically important (asset size of less than INR 5 billion)
- Harmonizing definitions of capital (Tier I and Tier II) with that of the NBFCs
- Applying directions on liquidity risk framework and securitization for the NBFCs, to the Housing Finance Companies
- Extending instructions issued to the NBFCs on implementation of Indian Accounting Standards, to the Housing Finance Companies (Prudential floor for expected credit loss will be based on the extant instructions on provisioning applicable to the Housing Finance Companies.)
Additionally, the key differences between the extant regulations of the Housing Finance Companies versus the regulations for the NBFCs are as follows:
- Capital requirements (Capital to Risk-weighted Assets Ratio, or CRAR, and risk-weights)—The minimum CRAR prescribed for the Housing Finance Companies is, at present, 12% and will be progressively increased to 14% by March 31, 2021 and to 15% by March 31, 2022. The risk-weights for assets of the Housing Finance Companies are in the range of 30% to 125%, based on factors such as asset classification, loan-to-value, and type of borrower. However, for the NBFCs, the minimum CRAR is 15% and risk-weights are broadly under the 0%, 20%, and 100% categories.
- Limits on exposure to commercial real estate and capital markets—The limits prescribed for the Housing Finance Companies shall not be more than 20% of capital fund for exposure to commercial real estate by way of investment in land and building and this limit shall not be more than 40% of net worth total exposure (of which direct exposure should be 20% of net worth) for capital markets exposure. However, no limits have been prescribed for the NBFCs.
Comment Due Date: July 15, 2020
Keywords: Asia Pacific, India, Banking, HFC, NBFC, Basel, Regulatory Capital, Housing Finance Companies, CRE, RRE, Credit Risk, Systemic Risk, RBI
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